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In 2010, Clyde McGregor and Edward Studzinski decided it was prudent to close their then-$18 billion
Oakmark Equity & Income
Fund (ticker: OAKBX) to new investors. Money was pouring in, but the value managers couldn't justify investing in a bloated bond market.

Two years later, bonds are still unsavory, says McGregor, but opportunities on the equity side make up for fixed income's shortcomings—and the fund has re-opened after losing $1 billion through outflows. "We created the portfolio to be defensive," says McGregor, whose longtime co-manager, Studzinski, retired last January. "The odd thing is, today defense is better played in equities than it is in fixed income."

Clyde McGregor has a unique perspective on the stocks and bonds in his portfolio.
Bob Stefko for Barron's

Not to be confused with equity-income funds that invest almost exclusively in dividend-paying stocks, this fund invests in a wide array of stocks and bonds. While the fund does offer a small yield, 1.81% for bonds and equity income, McGregor does not reach for yield at any cost. Finding underpriced assets, whether in stocks or bonds, is paramount. "We don't want to pay too much for income," says McGregor, who thinks that dividend stocks started looking pricey early this year. "Overpaying is the sin of a value investor, and we are trying to avoid that."

In a market where McGregor can find equal opportunities in stocks and bonds, the fund's allocation is apt to be about 40% bonds and 60% stocks, he says. At the moment, however, 70% of the fund is in equities, the highest allocation in its history. The bulk of Oakmark Equity & Income's fixed-income allotment is in short-term Treasuries and intermediate-term inflation-indexed bonds, or TIPS. While this defensive stance contributes little to income on the bond side, says McGregor, it acts as a buffer against added volatility from the fund's large equity exposure.

McGregor is deliberate in his investment decisions, but his move into money management was rather happenstance. The Pittsburgh native studied economics and religion at Oberlin College in Ohio and planned to pursue a career in welfare policy. "I was literally packing my car to head to D.C. when I received a telegram that my job had been eliminated," he recalls. For lack of a better option, he enrolled in business school. One thing led to another, and in 1981 he found himself working as an analyst at Oakmark's investment advisory, Harris Associates, in Chicago. More than three decades later, he has the most tenure of anyone on the investment team. He also co-manages
Oakmark Global
(OAKGX).

"I lucked into a career where every day offers a unique challenge," says McGregor, who just celebrated his 60th birthday. "I very much enjoy what I'm doing and get to work with some very smart colleagues." One of those colleagues is venerable value manager Bill Nygren, whom McGregor helped recruit in 1983. "That's my real claim to fame," he jokes.

Of course, McGregor is an accomplished value manager in his own right. Equity & Income has lagged the market in recent years—chalk it up to his premature move into shorter-duration bonds, and his decision to not buy the likes of
Apple AAPL -1.5351744876157316%Apple Inc.U.S.: NasdaqUSD124.43
-1.94-1.5351744876157316%
/Date(1427835600323-0500)/
Volume (Delayed 15m)
:
40410221AFTER HOURSUSD124.49
0.05999999999998810.04821988266495218%
Volume (Delayed 15m)
:
1465687
P/E Ratio
16.657295850066934Market Cap
736073426681.742
Dividend Yield
1.5108896568351684% Rev. per Employee
2153110More quote details and news »AAPLinYour ValueYour ChangeShort position
(AAPL). Still, it has posted an average annual return of 8.4% over the past decade, better than 96% of its peers. In 2008, the fund was down 16%, versus 28% for its group. He doesn't gloat about that relative win. "It was still a terrible year in my perspective," says McGregor, who has most of his own personal wealth invested in the fund. "My commitment is to make money for my clients in all environments."

*All returns are as of 10/31/12; three- and five-year returns are annualized. ** As of 9/30/12. Sources: Morningstar; company reports

That multifaceted approach turned up the $4 billion American auto-parts maker
LearLEA -0.6187785848802798%Lear Corp.U.S.: NYSEUSD110.82
-0.69-0.6187785848802798%
/Date(1427835768187-0500)/
Volume (Delayed 15m)
:
630377AFTER HOURSUSD110.82
%
Volume (Delayed 15m)
:
48932
P/E Ratio
13.303721488595437Market Cap
8700790984.32587
Dividend Yield
0.9023641941887746% Rev. per Employee
141582More quote details and news »LEAinYour ValueYour ChangeShort position
(LEA), which McGregor bought in January after noticing that auto-parts companies were trading at discounts to other industrials. He saw that Lear was a leaner version of its old self, having shuttered more than 40 manufacturing facilities and moved most of its production to low-cost nations. It's also sitting on $1 billion in cash, and has been buying back shares. McGregor expects Lear's shares to double as demand from a growing emerging-markets middle class.

The market also has overreacted to the challenges facing $58 billion
UnitedHealth GroupUNH -2.239669421487603%UnitedHealth Group Inc.U.S.: NYSEUSD118.29
-2.71-2.239669421487603%
/Date(1427835627098-0500)/
Volume (Delayed 15m)
:
4424450AFTER HOURSUSD118.293
0.003000000000000110.00253613999492772%
Volume (Delayed 15m)
:
105238
P/E Ratio
20.430051813471504Market Cap
115397095886.23
Dividend Yield
1.26806999746386% Rev. per Employee
767647More quote details and news »UNHinYour ValueYour ChangeShort position
(UNH), he adds. The stock has been stung by worries over health-care reform, yet the company is in tip-top shape, he says. It's buying back shares, expanding its network of providers, and making strategic acquisitions. "When we look at the sum of the parts, we get a company worth $90 to $100 per share," says McGregor. At the stock's recent price of $57, that's the kind of bargain he can feel good about.